DocketNumber: Docket No. 14176-78
Citation Numbers: 64 T.C.M. 1, 1992 Tax Ct. Memo LEXIS 396, 1992 T.C. Memo. 374
Filed Date: 7/1/1992
Status: Non-Precedential
Modified Date: 11/20/2020
*396 Decision will be entered under Rule 155.
Petitioners transferred stock to two foreign situs trusts in exchange for lifetime private annuities.
SUPPLEMENTAL OPINION
PARR,
The basic facts are as follows. During 1971 and 1972 petitioners transferred Teledyne, Inc. (Teledyne) stock to two foreign situs trusts, the Hylton Trust (created by a Canadian attorney) and the Florcken Trust (created by petitioner Vera Stern's father). Petitioners and their children were the beneficiaries of the Hylton Trust, and petitioner Vera Stern and her children were the beneficiaries of the Florcken Trust. In exchange for the Teledyne*398 stock, the Hylton Trust executed lifetime private annuities in favor of petitioners, and the Florcken Trust executed a lifetime private annuity in favor of petitioner Sidney Stern. 2 The annuities were computed using the fair market value of the Teledyne stock, life expectancy tables, and imputing an interest factor of six percent.
Before the transfers of stock, the Hylton Trust's assets were limited to an original contribution of $ 5,000, and the Florcken Trust's assets were limited to an original contribution of $ 1,000. The annuity agreements provided that both trusts were obligated to pay the annual annuities to petitioners regardless*399 of the value of the trusts' assets or the amount of income produced by the trusts. However, the trusts' liabilities only extended to the trusts' assets. Accordingly, if a trust's assets were exhausted, the trustee was not obligated to make any further payments. The annuity agreements contained both a default acceleration clause and a confession of judgment clause, and granted petitioners the right to assign the annuity payments.
The deeds of settlement with respect to each trust granted broad powers to petitioners. Petitioner Sidney Stern (and upon his death petitioner Vera Stern) possessed a power of appointment over the corpus of the Hylton Trust, and petitioner Vera Stern held a similar power with respect to the Florcken Trust. The powers of appointment were limited to the extent that the power could not be exercised directly or indirectly in favor of the donee, his estate, his creditors, or the creditors of his estate. However, the powers of appointment could presumably be exercised by petitioners in favor of each another. 3
*400 The deeds of settlement provided the trustee with a broad range of powers including the power to: (1) Guarantee petitioners' loans; (2) loan money to petitioners on an interest-free and unsecured basis; (3) pay premiums on petitioners' life insurance policies; and (4) distribute the trusts' corpus or income to petitioners. Petitioner Sidney Stern could dismiss the Hylton Trust's trustee without cause; petitioner Vera Stern held a similar power with respect to the Florcken Trust.
In two instances we have treated private annuity transactions as "closed", thereby resulting in the recognition of gain entirely in the year of sale,
In
Likewise in
*402 Our holdings in both
The possibility that the underlying assets securing payment could suffer a substantial decrease in value did not affect our holdings that the private annuities were secured.
Respondent argues that the private annuities at issue are secured within the meaning of
Petitioners, on the other hand, argue the private annuities are unsecured, and accordingly their tax treatment in compliance with
*404 In addition, the extent of petitioners' control in this case actually works against finding the annuities to be secured. Since an uncooperative trustee could be summarily replaced, petitioners could effectively deplete, appoint, or cash out the trust assets, thereby rendering the trusts unable to pay the annuities. Therefore, we find the private annuities in issue are unsecured, and accordingly the transactions are not closed within the meaning of
We have considered respondent's other arguments and are not persuaded.
1. All section references are to the Internal Revenue Code in effect for the years in issue, unless otherwise indicated.↩
2. During the years in issue, 1971 through 1973, petitioners received their annual annuity payments from the Hylton Trust. However, petitioner Sidney Stern did not receive his first annual payment from the Florcken Trust on the original scheduled commencement date of June 29, 1973, or at any other time during the years in issue, due to a later agreement with the Florcken Trust.↩
3. See
4. We note that both the
5. Petitioners reported the annuities in accordance with